AUD/USD gathers strength to near 0.6600 on weaker US Dollar

• AUD/USD gains ground to around 0.6595 in Monday’s early Asian session, adding 0.54% on the day. 
• US NFP registered the smallest gain since December 2020. 
• The RBA is expected to hold the Official Cash Rate at 4.35% on Tuesday.   

The AUD/USD pair gains momentum to near 0.6595 during the early Asian session on Monday. The uptick of the pair is bolstered by the softer US Dollar (USD) after the weaker-than-expected US October Nonfarm Payrolls (NFP) data. However, the uncertainty surrounding the US presidential election might boost the safe-haven flows and weigh on riskier assets like the Australian Dollar (AUD). 

Data released by the US Bureau of Labor Statistics (BLS) on Friday showed that the NFP in the US rose by 12,000 in October, followed by the 223,000 increase (revised from 254,000) seen in September and missed the market estimation of 113,000 by a wide margin. Meanwhile, the Unemployment Rate arrived at 4.1% in October, in line with the consensus. 

Financial markets have fully priced in a 25 basis points (bps) rate cut by the US Federal Reserve (Fed) at its November meeting on Thursday. Economists expect another quarter-point rate cut in December and possibly additional such moves next year. Investors will closely monitor the US presidential election outcome on Tuesday as it might trigger volatility in the financial markets. 

On the Aussie front, the Reserve Bank of Australia (RBA) is anticipated to keep interest rates unchanged at a 13-year high amid a slow pace of disinflation and rising global uncertainties, highlighted by an upcoming US presidential election. “Globally, there’s more uncertainty than usual and coupled with the domestic data, argues for caution and patience from the RBA,” said Su-Lin Ong, chief economist at Royal Bank of Canada. 

Australian Dollar FAQs

What key factors drive the Australian Dollar?

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

How does the health of the Chinese Economy impact the Australian Dollar?

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

How does the price of Iron Ore impact the Australian Dollar?

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

How does the Trade Balance impact the Australian Dollar?

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

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